The Wall Street Journal gets it right on commissions

But like everyone else, buyer agents don’t work for free. At first glance, it seems like the seller pays them, since most are paid at closing from the commission costs that the seller pays, just as in the past. In reality, buyers pay for everything, since sellers routinely factor these costs into the asking price for the home. (ed. note: and the buyers are the ones getting the loan) The typical real-estate commission ranges between 5% and 6%, split between the buyer and seller agents. Since the median price of an existing home is currently $208,400, that means a buyer is effectively paying between $5,210 and $6,252 for representation in a typical transaction.

The buyer’s agents who advertise their services as “free” seem to be attempting to fool someone – themselves, their clients or both.

Who can blame them, though? That’s the way it’s always been, so why change?

Standard of Practice 12-2
REALTORSÂ®may represent their services as â€œfreeâ€ or without cost even if they expect to receive compensation from a source other than their client provided that the potential for the REALTORÂ® to obtain a benefit from a third party is clearly disclosed at the same time. (Amended 1/97)

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Comments

But they don’t necessarily get it right on pricing the home. Show me where all the FSBOs are with their prices reduced by a few percentage points because there’s no commission involved? They don’t exist.

It’s still more common to find an overpriced FSBO than one where the prices is lower because of the lack of commission.

If commissions were divorced, would all prices in the MLS suddenly drop by 2 – 3 percent? Absolutely not.

The buyer pays as part of their mortgage. But the seller also “pays” by having a reduced net. It’s two sides of the same equation.

Many unrepresented sellers do in fact lower their prices by a commensurate amount, but ultimately it’s up to the buyer’s agent and the buyer to determine fair market value.

If commissions were divorced, the prices in the MLS, while not immediately, would find their equilibrium and the buyer’s agent fee would not be dependent on whatever the sellers’ agent is offering.

If Buyers’ Agents actually signed Buyer Agency agreements (which I do) and negotiated their fees up front (which I do) they wouldn’t – and more importantly- the perception of the public wouldn’t be that buyers agents only go to the properties offering higher commissions.

I have never liked the remark “the seller pays my commission”. It is worn out and any buyer who does the math knows reality. I agree with Jim’s remarks with disclosure upfront. Your client (buyer) will probably be shocked with your honesty.

Awesome post! As primarily a Buyer’s Agent myself, I always tell my clients that I get paid from the seller’s proceeds, but it’s factored into the price of the home so they are actually paying for my services out of their own pocket (and over the course of 30 years with interest if you really think about it).

Unfortunately, other agents are so honest. And they don’t have to be accoriding to the NAR CoE. I can’t believe that NAR would actually put that into the Code Of Ethics. No wonder so moany consumers give the CoE zero weight.

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About Jim Duncan

I am a Realtor/Broker/Partner with Nest Realty in Charlottesville, Virginia. The goal of this site/blog remains unchanged in the nearly 10 years since its founding – to provide clear, coherent and unbiased analysis of the Charlottesville area real estate market.